The previous section reviewed theoretical explanations behind economic sanctions and trade.
When revising the empirical literature on sanctions, empirical research mainly takes a macroeconomic perspective, studying the aggregated behavior of the target and sender countries to determine how they are affected by sanctions. Empirical literature does, to a smaller extent, take microeconomic effects into account when evaluating sanctions.
In this section, relevant empirical literature is presented. The first three sub-sections take a macro perspective: 3.1 investigates economic sanctions’ effectiveness, 3.2 presents empirical literature investigating the benefits of international trade, while 3.3 highlights the literature’s perspective on how sanctions undermine benefits from international trade. Further, section 3.4 presents literature on how firms adapt to economic sanctions, followed by a summary of the reviewed literature. Section 3.6 presents our hypothesis based on the presented literature and theories.
3.1 Effectiveness of Economic Sanctions
A significant part of research on economic sanctions examines a sanction´s effectiveness, and under what conditions a sanction is likely to reach its desired goals or political objectives (Stepien et al., 2016). The most influential and widely cited source on economic sanctions comes from the researchers Hufbauer, Schott and Elliott which in 1982 registered and studied 103 episodes of economic sanctions, published in Economic Sanctions Reconsidered: History and Current Policy (Hufbauer et al., 2007). The purpose of their study was to determine the effectiveness of economic sanctions as a foreign policy tool and identify under what conditions they are most likely to reach their policy goal. Later, several editions of their study were published with an updated dataset including new cases of economic sanctions. The newest edition includes over 200 cases of economic sanctions which have been summarized over 14 different variables in order to analyze their effectiveness. In contrast to current beliefs on sanctions being ineffective, their research found sanctions only reached their policy objectives one third of the time. Theirs empirical results caused a shift in the consensus from skepticism to positivism in academia (Pape, 1998).
Doubtful to the emerging optimism about economic sanctions, Robert Pape challenged the study of Hufbauer, Schott and Elliott and claimed their database (HSE-database) had major flaws. Through a reexamination of the 40 cases claimed successful, Pape concluded only 5 as successful. The reason was the methodological error in the HSE-database which
“inappropriately includes (…) commercial negotiations and economic welfare” (Pape, 1997).
In his study, he concludes economic sanctions have a low success rate and that they frequently fail in reaching their policy objective.
In order to identify factors affecting the success and failure of sanctions, van Bergeijk (1989) conducted a study to analyze the conditions in which an economic sanction causes a reaction from the target. His results support the idea of longer sanction periods making sanctions less successful. He also finds that the probability of success increases with a higher trade linkage in pre-sanction periods, and the more unstable the target´s political situation is. This is explained by a hypothesis that potential damage increases as trade linkages increase and that a sanction has a better chance to succeed against a weak regime.
Further, Dizaji and van Bergeijk (2013) detected how economic and political impacts of an economic sanction can explain why a sanction is more successful in the first two years. In their empirical analysis, using Iran as a case study, they find that a sanction´s effect can be linked to its duration or time span. Here, a sanction has a greater effect in the initial phase, which decreases with time. Hence, sanctions have a higher probability of success in the earlier stages since the possibility of economic adjustments makes it possible to alleviate the impacts of sanctions in the long run.
Afesorgbor (2016) finds a similar result where the effectiveness of a sanction is determined by its duration. Here, sanctions with longer time span are less successful. The reason is that the time dimension gives actors negatively affected in the target economy, the possibility to adopt strategies that can mitigate the costs of the sanctions.
In addition to research on sanctions’ effectiveness and success, newer literature focus on the unintended consequences of sanctions and highlights the importance of including such factors when evaluating a sanction´s effect, success or failure. Although, the sanction’s objective is meant to target the government, civilians are often caught in the crossfire capturing many of the negative effects. As a result, sanctions decrease the economic growth and development in
the target country (Afesorgbor, 2016). These adverse effects have caused a shift towards the use of “smart sanctions” where the consequences of the sanction are targeted towards the government in order to protect the civilian population. As a result, smart sanctions are considered more effective compared to broader sanctions (Hufbauer & Oegg, 2000).
Andreas (2005) also look at the broader effects of sanctions and contributes to the literature by looking at the criminalizing consequences of economic sanctions. His research analyzes the potential criminalizing effects of sanctions within and around the target country, and during and after the sanction period. Here, he has developed his own analytical framework to identify and categorize potential criminalizing effects, such as organized crime, smuggling, underground economic activity and corruption. The results suggest that sanctions unintentionally can contribute to criminalization of the state, economy and civil society.
3.2 Benefits of International Trade
Sachs and Warner (1995) conducted a study to assess the effect of global integration on economic growth in countries undergoing economic reforms to integrate the country with world systems. They found a positive correlation between trade liberalization and economic growth, and that openness to trade is correlated with stable macroeconomic policies and a more responsible government.
Further, Fetahi-Vehapi, Sadiku and Petkovski (2015) conducted a panel data analysis of 10 countries in South-East Europe to estimate the effect of openness to trade on economic growth.
They find that positive effects of trade are contingent on initial levels of income per capita and that higher initial income per capita causes trade to be more beneficial for a country. Samimi and Jenatabadi (2014) conducted a similar study where they investigated members of the Organization of Islamic Cooperation (OIC) in order to deter the effect of globalization on economic growth and income levels. Their study finds evidence of economic globalization increasing economic growth and that this effect increases when workers in a country have higher education and better financial systems. Further, they find that benefits from trade depend upon the income level in a country, where countries of high or middle income have the highest benefits, while the effect is small for low-income countries. This is explained by
low-income countries suffering from underdeveloped financial systems and less skilled labor, making it more difficult to utilize from trade.
Following Schneider (2004), trade encourages innovation in a country as foreign technology gets available. These findings are found by empirically investigating whether trade can determine the rate of innovation and economic growth in developed and developing countries.
Additionally, he locates market size and infrastructure as the most important factors for the rate of innovation resulting from international trade.
Moreover, Keller and Yeaple (2009) estimate international technology spillovers to U.S.
manufacturing firms via imports and foreign direct investments (FDI). Their results suggest that FDI lead to substantial productivity gains, accounting for around 14 percent of U.S. firms’
productivity growth between 1987 and 1996. Similarly, Chuang and Hsu (2004) finds that the presence of foreign ownership in a country has a positive effect on domestic firms’
productivity, investigating China’s manufacturing sector. In addition, they find that trade helps Chinese firms get access to newer technology and information, which increase their productivity and makes the country able to compete in international markets. These findings are also supported by Koko, Zejan and Tansini (2001) who looks at the spillover effects of FDI in Uruguay. They find that the labor productivity of local firms increases with the presence of older multinational companies (MNC) in their industry. Additionally, they find evidence that local firms may pick up skills from the outward-oriented foreign MNCs, which increase the local firms’ likelihood to engage in exporting. Lee (2005) find support that international knowledge spillovers increase through inward FDI, however outward FDI does not show to conduct this knowledge spillover in his research.
3.3 Economic Sanctions and Their Impact on Trade
Regardless of the effectiveness of sanctions, economic sanctions can still affect the trade relation between the sender and target country (Afesorgbor, 2016). When trade is deprived, it reduces the benefits from international trade and consequently lowers welfare (van Bergeijk, 1989). Whether the sender or target country is more or equally affected by this loss in benefits depends on a various of factors, e.g. type of sanction (embargo versus boycott) or the possibility to substitute goods (both for imports and exports).
Following Morrow, Siverson and Tabares (1998), trade flows are affected by politics since actors in international trade care about political risk. They argue that increased political conflict between countries, disrupt trade between countries by introducing risk to economic actors. The greater the likelihood of a conflict, the more profitable trade must be to compensate for the risk of disruption (Afesorgbor, 2016; Morrow, Siverson, & Tabares, 1998). This view is also confirmed by Fuchs and Klann (2013), who empirically investigate whether countries that officially receive the Dalai Lama, despite China’s opposition, are punished for this through a reduction in their exports to China.10 They prove that even without an explicit conflict or formally declared economic sanction, political disagreement can affect bilateral trade.
Further, Heilman (2016) uses a difference-in-difference method in order to estimate the impact of several incidents of politically motivated boycotts in the time period 2005 until 2016. His results show that boycotts can have a significant negative effect on bilateral trade. However, Heilman estimates a rather small effect of the boycott on the boycotted country’s overall trade.
This suggest that countries with diverse range of export goods and destinations, can substitute some of their exports towards non-boycotting countries.
Kolstad (2016) uses a synthetic control approach to estimate the effect of the Chinese sanctions following the 2010 Nobel Peace Prize on Norwegian exports of fish and other goods. In addition, he estimates the effect of the prize on Norwegian foreign policy on human rights. He finds that the sanctions reduced both direct total exports and direct exports of fish from Norway to China. These results suggest that direct total exports would have been 10 to 16 percent above their actual levels in the period between 2011 and 2013, and that direct fish exports would have been 10 to 14 percent above their actual levels. Commenting on these results he adds that some of the reduction in exports could have been "compensated through higher exports through third countries such as Hong Kong or Vietnam" (Kolstad, 2016). He also finds that by 2014 exports rebounded to normal levels, meaning that he could not find any significant difference between Norwegian exports and the comparable control group. He explains this normalization by a weakening of Norwegian foreign policy and Norwegian
10 The so called “Dalai Lama effect” (Fuchs & Klann, 2013)
government’s efforts to distance itself from the prize. His research also shows that immediately after the prize, Norwegian agreement with Chinese voting in the UN on human right resolutions increased.
Caruso (2003) investigates the impact of economic sanctions on international trade, using a gravity model approach to estimate the impact of [negative] economic sanctions on international trade. His results, using data on bilateral trade between the U.S. and 49 target countries, show that multilateral sanctions have a large negative effect on trade flows. Part of his study focuses on the impact of unilateral U.S. sanctions on bilateral trade between sanctioned countries and the other G-7 countries. Unilateral extensive sanctions show to have a large negative effect, while limited and moderate sanctions cause a positive effect on other G-7 countries aggregate bilateral trade. These results confirm the fact that sanctions-busting actions are always likely to occur, and that in terms of imposing an economic sanction there is always a risk that the sanction will be inefficient because of sanctions-busting activities.
3.4 How Firms Adapt to Economic Sanctions
How a country responds to an economic sanction does not only rely on the reactions from the government, but also upon consumers and producers in the economy and their behavior (Afesorgbor, 2016). Van Bergeijk (1989) states that “quite generally sanctions are believed to be ineffective because it is normally impossible to create the necessary political unity for a forceful embargo and (if established) embargoes and trade warfare are easy to circumvent”.
Firms and private actors do not necessarily comply to the sanctions imposed by foreign and national governments but adapts to the sanctions in order to minimize/maximize the potential negative/positive impact. The literature highlights this in different ways.
Chen and Garcia (2016) combine personal interviews of stakeholders in the Norway-China salmon trade with examinations of trade data to investigate several aspects of the Chinese sanctions against Norwegian salmon. In particular, the study confirms that China's economic sanctions were implemented through non-tariff barriers due to awarding the Chinese dissident, Liu Xiaobo, the Nobel Peace Prize. In addition, they describe how Chinese and Norwegian firms, and other regional players, circumvented the sanctions. They suggest that private actors have busted the Chinese sanctions by circumventing stricter border measures, rerouting of
goods, falsifying country-of-origin certification and smuggling among other illegal actions.
They point out that even though official statistics show a reduction in Norway's market share in the Chinese salmon market, despite a growth in total imports of salmon to China, official data do not record Norwegian salmon entering illegally.
The study of Chen and Garcia (2016) is somewhat related to the results of Heilmann (2016).
Part of his analysis suggests that firms that face boycotts, with a diverse range of export goods and destinations, can substitute some of their exports to other non-boycotting countries.
Afesorgbor (2016) takes a different perspective and looks at the impact of the threat of sanctions compared to imposed sanctions. Equivalent to Caruso (2003) and Heilmann (2016) his results imply that imposed sanctions lead to a decreased bilateral trade flow between target and sender country. On the other hand, a threat of an economic sanction leads to an increase in these trade flows. This positive impact on trade flows is explained by economic agents’
actions to minimize the negative consequences of an actual imposition of sanctions (Afesorgbor, 2016). Following Fuchs and Klann (2013), firms engaging in international trade do not only make strategic decisions based on measures such as price and quality, but also based on the political risk associated with trade and its financial return.
Moreover, Li and Sacko (2002) investigates how uncertainty in the form of conflict affects trade. In their paper, they state that governments in conflict has incentives to inflict trade restrictions on the other parties involved. When implementing trade restrictions, the government has several options to choose from as economic sanctions, embargoes or other limitations on export. Their research suggests information conditions affect trading firms’
beliefs about expected returns and that they adjust trade accordingly. Hence, firms will continuously evaluate and update their expectations of future returns and take this into account in their decision making.
3.5 Summary of the Empirical Research
A significant part of the research on economic sanctions examine a sanction’s effectiveness, and what factors determine a sanction’s success or failure. The two most discussed articles in the literature is the research done by Hufbauer, Schott and Elliott in 1982 and Robert Pape in
1997, who genuinely disagree about to which extent economic sanctions is an effective foreign policy tool. Some of the important conditions identified in the literature to determine a sanctions success is the duration of the sanction, degree of trade linkage between sender and target country and target county’s political regime (e.g. van Bergeijk, 1989; Dizaji & van Bergeijk, 2013). Newer research on sanction’s effectiveness and success focus more on its unintended consequences (e.g. Andreas, 2005; Afesorgbor, 2016).
Regardless of the effectiveness of sanctions, economic sanctions can still affect the trade relation between the sender and target country. Theory and empirical literature on international trade emphasize the wealth gain and benefits which follows trade (e.g. Fetahi-Vehapi et al., 2015; Keller & Yeaple, 2009; Schneider, 2004; Samim & Jenatabadi, 2014). In addition, the empirical literature on economic sanctions shows that economic sanctions reduce trade flows between countries (e.g. Morrow et al., 1998; Caruso, 2003; Fuchs and Klann, 2013; Kolstad, 2016), hence lower the potential wealth gains and benefits.
Furthermore, the literature on economic sanctions identifies how firms and private actors adapt to sanctions by circumventing them. Circumvention can in some situations be done through both legal and illegal actions (Chen & Garcia, 2016), and the duration of the sanctions is said to give the firms involved, the possibility to adopt strategies that can mitigate the costs of the sanctions (Afesorgbor, 2016). Firms also seem to take political risk into account in their decision making, where economic sanctions and political instability increase the potential costs on firms and their aversion to trade (Fuchs & Klann, 2013; Li & Sacko, 2002).
3.6 Hypotheses
Economic sanctions are sometimes imposed to affect influential firms or industries in the target country negatively, in order to compel these firms or industries to lobby their home government in senders desired direction (Rielly, 2012). It has also been proven that the economic sanctions China imposed against Norwegian salmon have been successful in terms of being able to change Norwegian foreign policy (Kolstad 2016). Following both terminology and theories presented in section 2 and the literature review in section 3, the first hypothesis of our thesis is:
Hypothesis 1: The Chinese sanctions had a negative financial impact on Norwegian salmon exporters.
The first hypothesis does not take the time dimension of the sanctions into account. There might be that the impact of the Chinese sanctions differed over time. The second hypothesis of our thesis is therefore:
Hypothesis 2: The Chinese sanctions had a greater negative impact on Norwegian salmon exporters in the short run than in the long run.